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Microeconomics 1
Spring 2013
Lecture Three
Chapter 3: Demand & Supply
Learning Outcomes:
After studying this chapter you will be able to:
1- Understand Demand and its determinants.
2- Understand supply and its determinants.
3- Explain how demand and supply determine prices and quantities bought and sold.
Market and Prices:
A market is any arrangement that enables buyers and sellers to get information and do
business with each other.
The money price of a good is the amount of money needed to buy it.
The relative price of a good—the ratio of its money price to the money price of the next
best alternative good—is its opportunity cost.
1- Understand Demand and its determinants:
If you demand something, then you
1. Want it,
2. Can afford it, and
3. Have made a definite plan to buy it.
Wants are the unlimited desires or wishes people have for goods and services. Demand
reflects a decision about which wants to satisfy.
The quantity demanded of a good or service is the amount that consumers plan to buy
during a particular time period, and at a particular price.
Microeconomics 2
Spring 2013
1-a) The Law of Demand:
The law of demand states that other things remaining the same, the higher the price of a good,
the smaller is the quantity demanded; and the lower the price of a good, the larger is the quantity
demanded.
The law of demand results from

Substitution effect: When the relative price (opportunity cost) of a good or
service rises, people seek substitutes for it, so the quantity demanded of the
good or service decreases.

Income effect: When the price of a good or service rises relative to income,
people cannot afford all the things they previously bought, so the quantity
demanded of the good or service decreases.
1-b) Demand Curve and Demand Schedule:
The term demand refers to the entire relationship between the price of the good and quantity
demanded of the good.
A demand curve shows the relationship between the quantity demanded of a good and its price
when all other influences on consumers’ planned purchases remain the same.
Figure 3.1 shows a demand curve for energy bars.
A rise in the price, other things remaining the same, brings a decrease in the quantity demanded
and a movement up along the demand curve.
A fall in the price, other things remaining the same, brings an increase in the quantity demanded
and a movement down along the demand curve.
A demand curve is also a willingness-and-ability-to-pay curve. The smaller the quantity available,
the higher is the price that someone is willing to pay for another unit. Willingness to pay
measures marginal benefit.
Microeconomics 3
Spring 2013
1-c-Determinants of Demand:
When some influence on buying plans other than the price of the good changes, there is a change
in demand for that good.
The quantity of the good that people plan to buy changes at each and every price, so there is a
new demand curve.
When demand increases, the demand curve shifts rightward. When demand decreases, the
demand curve shifts leftward.
Six main factors that change demand are

The prices of related goods :

A substitute is a good that can be used in place of another good.

A complement is a good that is used in conjunction with another good.
When the price of substitute for an energy bar rises or when the price of a complement of an
energy bar falls, the demand for energy bars increases.

Expected future prices:
If the expected future price of a good rises, current demand for the good increases and the
demand curve shifts rightward.

Income:
When income increases, consumers buy more of most goods and the demand curve shifts
rightward.
A normal good is one for which demand increases as income increases.
An inferior good is a good for which demand decreases as income increases.

Expected future income and credit:
When expected future income increases or when credit is easy to obtain, the demand might
increase now.

Population:
The larger the population, the greater is the demand for all goods.

Preferences:
People with the same income have different demands if they have different preferences.
Microeconomics 4
Spring 2013
Figure 3.2 shows an increase in demand.
Because an energy bar is a normal good, an increase in income increases the demand for energy
bars.
What is the effect of an increase income on the demand of an inferior good?
1-d)A Change in the Quantity Demanded Versus a Change in Demand:
Figure 3.3 illustrates the effect of a change in the quantity demanded.
When the price of the good changes and everything else remains the same, the quantity
demanded changes and there is a movement along the demand curve.
Microeconomics 5
Spring 2013
Figure 3.4 illustrates the effect of a change in demand.
If the price remains the same but one of the other influences on buyers’ plans changes,
demand changes and the demand curve shifts.